RSM Australia

How SMEs can reverse their exposure to insolvency risk

Renewed interest by the ATO in recovering outstanding debt serves as a wake-up call for countless Australian companies that only manage to continue trading with insufficient cash flow due to a benign interest rate environment and by not complying with debt obligations.

If you’re one of Australia’s countless ‘walking dead’ companies that’s only managed to survive higher-than-average debt levels due to historically low interest rates, you’re highly exposed to liquidation once rates return to historical levels, and you’re no longer able to service debt.

What’s more, plans by the ATO to pursue recovery actions on debts as low as $60,000 may accelerate the wind-up process.

Company directors who claim they didn’t see liquidation coming are either lying or too incompetent to detect the most obvious warning signs that things are going from bad to worse.

The best way to detect if your company is a walking liquidation ‘time-bomb’ is to honestly assess whether you’re making late or altered GST, PAYG, and super payments, constantly extending credit terms & overdrafts, and cutting costs through redundancies.

Just over half the respondents to our recently released national survey of 1,500-plus Australian business owners, consultants, and directors claim more pro-active collection actions by the ATO, directly contributed to a 31.9 percent increase in official liquidations recorded by ASIC last year. 

Equally concerning, with around two thirds of survey respondents (64.8%) noticing an increase in companies displaying ‘walking dead’ characteristics - notably varying degrees of insolvency – we expect wind-up notices to increase over the next 18-24 months.

Interestingly, survey respondents thought insufficient cash flow exposed companies to a much greater risk of insolvency than any policy tightening by the ATO.

While cash flow shortage is the single biggest tell-tale sign of ‘walking dead’ status, stalling payments, borrowing more and asking for extended trading terms is a sure sign things are getting worse.

 If you’ve been in denial or if after further investigation you find the business is heading rapidly towards ‘walking dead’ territory, you need to act now.

Instead of blaming the ATO for wanting to recover outstanding tax, you need to take active steps to avoid your exposure to insolvency risk.

That means ensuring you’ve got the necessary financial systems, including up-to-date information and accounting systems needed to prepare business plans, budgets, and cash flow forecasts.

Given that your underlying business might still be quite profitable; there are numerous steps within your control to prevent it from going bust by defaulting on debt provisions.

Most companies wait far too long to get help. Seeking proper advice early enough can not only make your business profitable again, but also restore shareholder value.